Oando Q2 Results Fails To Impress Me, What About You??

On the 24th of July, Oando hosts its Investors Conference Call in Edingburg Scotland with the hope of giving Investors an insight into the financial performance of the company for the first half of the year and off course a peek into what to expect in the future or more importantly at the end of the year. Till then, I will review their most recent financials in my usual short and precise manner with a more emphasis on the present and a peek into the past.

Revenue

The Company posted N350b in revenue this for the quarter ending June 2012, a 30.9% increase from the same period last year. This also followed the trend set in the first quarter when Turnover increased by 38.03% over the previous period in 2011. Its also more than double the half year result of N172.bb obtained in 2010. But does the increase in revenue translate to higher profits?

Gross Profits

Gross Profits for the first half of 2012 dropped 6.67% to N31b. This was due to higher cost of sale for the period increasing by 36.2% over the same period last year. At N31b their Gross Profit Margin was a mere 8.8% signifying a highly competitive business environment. At a margin of just under 9% the company is engaged in a business segment that required huge cost outlay to generate profits. Compare this to Dangote Cement which boasts of Gross Profit Margins of 50%.

Operating Income 

Despite the huge overhang of its direct cost, the company was still able to churn out marginal operational profit for the period. At N16.2b its operational profit margin was 21% lower than the same period last year. Their thin operational profit margin of 4.6% also came lower than the 7.7% posted in the same period last year. SG& A also chucked up 63% of Gross Profit. At N19b, SG & A was a little lower than N20.4b obtained in the prior year.

Profit Before Tax and After Tax

Thankfully, the company was able to keep finance cost low at N5.8b. Even so it was 36% of operating profits just slightly lower than the 37% Interest to Operating Profit percentage posted in the same period in 2011. Profit after Tax of N6.6 is in line with the N6.8b obtained in the same period last year and a paltry 1.9% of Revenue.

Liquidity and Leverage

The company’s cash dropped significantly by 34% to N13b during the period when compared to the same period in 2011. This probably indicates a lot more acquisitions as the company seeks to expand its operations in the upstream sector and also repaying loans which stood at over N90b at the end of March this year. At the end of six months, Oando owes N88.9b in debts 92% of its Net Assets. The high leverage position will continue to weigh down on cash flows and profitability in the months and years to come. A look at their 2011 Annual Report also shows the company had N119b in current liabilities, more than the N106b in core debtors. Interest on their long-term loans also range between 7% to 15% with tenor between 3 to 7yrs max. Total Liabilities therefore stood at about N225b as at December 2011.

Bottom Line

Oando is a proudly Nigerian indigenous company and plays in a territory largely dominated by multinationals with track record spanning several years. The Company unlike its foreign counterparts have to grapple with high interest rates obtainable locally and huge cost of doing business reflected in their cost of equity. Their ability to remain profitable over the last 5 years is indeed commendable amidst a highly competitive even though lucrative market.  But at a profit after tax of N6.6b their return on equity is about 7% showing no growth over the same period last year and the year before. The company may attribute most of its travails to the highly unstable downstream sector and yet to materialize to full potentials its several investments in the upstream and mid stream sector. However, this does not excuse this result from being sub par.

25/7/2011-12/7/2012

Investors seeking for companies with better returns on equity and consistent earnings growth may easily look away. For bounty hunters, who see any form of profit as a sign of optimism this may be an attractive buy position in the short – term. Its P.E ratio of 10.625 also represents a good bargain for potential buyers. But will it grow? As the graph above indicates, the share price has slopped downwards over the past year from N41.4 at the start of August 2011 to N14.47 as at 12th of July. You be the judge!!